In Latin America, recovery weaker for US allies

The nascent global recovery is dividing Latin America between economies that pay the price for ties with the United States and those that benefit from growing links with Asia, experts said.

“The US economy is getting better, but with a lot of uncertainty along the road,” Nicolas Eyzaguirre, the International Monetary Fund’s Latin American director, said at a conference Friday in Istanbul.

“The effect on Latin America will be very different depending on what’s your level of policy preparedness and what’s your linkage with the US and vis-a-vis Asia,” he said.

In its economic forecasts published Thursday, the IMF said that Latin America had begun to recover from the global economic crisis and would post growth of 2.9 percent in 2010.

But there were wide disparities, with countries such as Mexico, which depends heavily on the United States, losing out and others like Brazil benefiting from rising exports to China.

The United States is the epicentre of the crisis, while China is leading global growth.

Brazil, the region’s economic engine, will suffer a modest contraction of 0.7 percent before revving up to 3.5 percent growth in 2010.

But Mexico, the other major economy in the region, will shrink a brutal 7.3 percent this year and expand 3.3 percent next year, the IMF projected.

“If it was not for China we wouldn’t have seen positive growth in the second quarter in Brazil,” said Ilan Goldfajn, chief economist at Brazilian bank Itau Unibanco, in the IMF organised conference in the Turkish city ahead of IMF annual meetings on Tuesday and Wednesday.

Thanks to its trade ties to Asia, where demand for raw materials surged in the second quarter, Brazil drove the recovery for the entire Latin America economy.

Goldfajn, a former deputy governor Brazil’s central bank, said Brazil used to export mostly to the United States, but “China is overcoming exactly now the US as our main export destination” for the first time in the country’s history.

The economist said that generally the region’s economic health depends on the degree of economic links to the United States, saying Colombia, Brazil or Argentina were at a safer distance.

Mexico, which is a partner with the United States and Canada in the North American Free Trade Agreement, is like Central American and Caribbean countries, many of which have free-trade pacts with Washington, in that it relies on remittances from emigrants in the world’s largest economy.

David Robinson, deputy Latin America director at the Washington-based IMF, pointed to the importance of the US economy to the region amid the excitement about China, which is driving the global economy this year with growth of 8.5 percent, according to the fund.

“The lower potential growth in the US, and I will also add in some other countries including those in the euro area, will adversely affect Latin America,” he said.

Robinson said that the US economy was expected to grow some 6.0 percent below potential this year, while Latin America would underperform by half that amount.

He warned that growth rates in Latin America would be slow to return to pre-crisis levels, when the region enjoyed six year of economic boom, mainly due to its commodity exports to Asia.

For Goldfajn, the region’s growth will be spurred via its relations with China.

“When the world will rebalance towards Asia, it will take time, it will be difficult, but if this is the case, then the region seems to be already on the way to rebalance itself also,” he said.